Public economics: Income Inequality

Transcription

1 Public economics: Income Inequality Chris Belfield

2 Overview Measuring living standards Why do we use income? Accounting for inflation and family composition Income Inequality The UK income distribution Measures of income inequality Growth in inequality in 1980s Changes in inequality since 1990 Belfield et al. (forthcoming) Summary

3 Why income? Economic analysis tends to focus on income inequality and income poverty not because income is the only thing that matters......but because it is arguably the best measure of living standards we ve got Consumption may be conceptually a better indicator of living standards Income snapshots can be misleading But it is difficult to measure...

4 Median Expenditure Those with the lowest incomes do not have the lowest consumption Income Source: Brewer and O Dea (2012)

5 Material Deprivation We can also look at another measure of hardship material deprivation This is an indicator of families being unable to afford certain items e.g a warm winter coat or to save 10 a month The answers to these questions are used to create a deprivation score out of 100 If more than 25 then classed as materially deprived Items that the majority of the population can afford are given more weight

6 Percentage in material deprivation... Nor are they most likely to be materially deprived 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Poorest Whole-population income vingtile Source: Figure 5.7 of Living Standards, Poverty and Inequality: 2015

7 Measurement of income Income as measured by government in Households Below Average Income (HBAI) Based on Family Resources Survey (from onwards) 20,000 households across the UK Subject to sampling error Income is measured net of direct taxes and benefits Measured at the household level (implicitly assumes income sharing) Adjusted for inflation

8 RPI and its problems In the official statistics RPI is used to account for inflation over time However recently RPI has been thought to overstate inflation due to a formula effect Given the same price changes the RPI methodology will measure inflation to be around 1% higher than CPI It has been declassified as an official statistic An alternatives include RPIJ and CPIH......but we use a variant of CPI we constructed ourselves

9 Median BHC income (1997=100) Adjusting for inflation % RPI CPI adj 25% Notes: The RPI line is in fact RPI minus council tax, the inflation measure currently used to adjust HBAI incomes

10 Measurement of income Income as measured by government in Households Below Average Income (HBAI) Based on Family Resources Survey (from onwards) 25,000 households across the UK Subject to sampling error Income is measured net of direct taxes and benefits Measured at the household level (implicitly assumes income sharing) Adjusted for inflation Adjusted for household size (equivalised)

11 Adjusting for household size Unequivalised Equivalised Source: FRS data years 1968 to

12 Median income (Indexed to 100 in 2003) Median income since % Source: Figure 2.3 of Living Standards, Poverty and Inequality: 2016

13 Income inequality

14 Thousands of people The UK income distribution in th percentile: s of weekly income (equivalised) Source: Figure 3.1 of Living Standards, Poverty and Inequality: 2014

15

16

17

18

19

20

21 Share of total income (%) Measuring income inequality: the Gini coefficient A Gini = A + B Perfect equality A B Percentage of population, ranked by income

22 Share of total income (%) Measuring income inequality: the Gini coefficient Perfect equality A B Percentage of population, ranked by income

23 Gini coefficient: 1961 to

24 Why did income inequality rise in the 1980s? Lots of explanations Skills-biased technological changes [see Acemoglu (2002), Machin (2001) and Goldin and Katz (2008)] Labour market institutions: weaker trade unions and a decline of collective bargaining (Goodman and Shephard 2002)

25 Impact of trade unions on inequality Quantile regression and Chambelain (1994)

26 Quantile regression OLS minimises the SQUARED errors: Median regression minimises ABSOLUTE errors: Quantile regression minimises the CHECK function:

27 Impact of trade unions on inequality Quantile regression and Chambelain (1994)

28 Why did income inequality rise in the 1980s? Lots of explanations Skills-biased technological changes [see Acemoglu (2002), Machin (2001) and Goldin and Katz (2008)] Labour market institutions: weaker trade unions and a decline of collective bargaining (Goodman and Shephard 2002) More inequality in employment status across households (Gregg and Wadsworth, 2008) Changes in the tax and benefit system

29 Increase in Gini relative to Impact of tax and benefit system 0.05 Increase in Gini relative to Source: Adam and Browne (2010). Note: Tax and benefit systems from previous years have been uprated in line with the Retail Prices Index. Years up to and including 1992 are calendar years; thereafter, years refer to financial years.

30 Gini coefficient income ratio Gini coefficient: 1961 to Gini (LHS) ratio (RHS)

31 Top 1% share of income Income share of top 1% 9% 8% 7% 6% 5% 4% 3% 2%

32 Inequality in the UK since Net household income 90:10 Male hourly wage 90: Source: Figure 4 Belfield et al. (forthcoming)

33 Average annualised real growth (%) Male earnings inequality Male weekly earnings Male hourly wages Percentile Source: Figure 5 Belfield et al. (forthcoming)

34 Average annualised real growth (%) Female earnings inequality Female hourly wages Female weekly earnings Percentile Source: Figure 5 Belfield et al. (forthcoming)

35 Average annualised real growth (%) Individual and household earnings 2.5% 2.0% Individual earnings Household earnings 1.5% 1.0% 0.5% 0.0% Percentile Source: Authors calculations using FRS

36 Average annualised real growth (%) Earnings to income for working households 2.0 Gross labour income Gross income plus transfers Net income Source: Figure 7a Belfield et al. (forthcoming) Percentile

37 Average annualised real growth (%) Earnings to income: Discretionary benefit increases Gross labour income Gross income plus transfers Net income Source: Figure 7b Belfield et al. (forthcoming) Percentile

38 Average annualised real growth (%) Earnings to income: Automatic stabilisers Gross labour income Gross income plus transfers Net income Source: Figure 7c Belfield et al. (forthcoming) Percentile

39 Average annualised real growth (%) Earnings to income for working households 2.0 Gross labour income Gross income plus transfers Net income Source: Figure 7a Belfield et al. (forthcoming) Percentile

40 Household income of non-pensioner workless households relative to working households Workless household incomes 60% 55% 50% 45% 40% 35% 30% Source: Figure 3.7 Belfield et al. (2015)

41 Proportion of workless households 25% 20% 15% 10% 5% 0% Source: Figure 3.7 Belfield et al. (2015)

42 Household income of pensioners relative to non-pensioners Pensioner incomes 105% 100% 95% 90% 85% 80% 75% 70% 65% 60% Source: Figure 3.6 Belfield et al. (2016)

43 Average annualised real growth (%) Earnings to income for working households Working non-pensioner Non-pensioner All Source: Figure 7a Belfield et al. (forthcoming) Percentile

44 Inequality in the UK since Net household income 90:10 Male hourly wage 90: Source: Figure 4 Belfield et al. (forthcoming)

45 Summary When using measures of living standards it is important to correctly account for inflation and household composition Income inequality rose rapidly in the 1980s......but in the last twenty years income inequality has fallen amongst most of the population This was due to redistributive taxes and benefit changes and the catch up of pensioner and workless household incomes But the top 1% have continued to pull away during this period

46 References (1) Acemoglu, D. (2002) Technical Change, Inequality and the Labor Market, Journal of Economic Literature 40 (1) Adam, S., and Browne,J. (2010) Redistribution, work incentives and thirty years of UK tax and benefit reform, IFS Working Paper 10/24 Belfield, C., Blundell, R., Cribb, J., Hood, A., and Joyce, R. (Forthcoming) Two Decades of Income Inequality in Britain: The Role of Wages, Household Earnings and Redistribution Economica Belfield, C., Cribb, J., Hood, A., and Joyce, R. (2016) Living standards, poverty and inequality in the UK: 2014, Institute for Fiscal Studies Report Belfield, C., Cribb, J., Hood, A., and Joyce, R. (2015) Living standards, poverty and inequality in the UK: 2014, Institute for Fiscal Studies Report R96 Belfield, C., Cribb, J., Hood, A., and Joyce, R. (2014) Living standards, poverty and inequality in the UK: 2014, Institute for Fiscal Studies Report R96 Belfield, Blundell, Cribb, Hood and Joyce (2017) Brewer, M., and O Dea, C. (2012) Measuring Living Standards with income and consumption: Evidence from the UK, IFS Working Paper W12/12 Browne, J., Hood, A. and Joyce, R. (2013) Child and working-age poverty in Northern Ireland from 2010 to 2020, IFS Report R78 Cribb, J., Hood, A., Joyce, R., and Phillips, D. (2013) Living Standards, Poverty and Ineqaulity in the UK: 2013 IFS Report R81

47 References (2) Cribb, J., Joyce, R., and Phillips, D. (2012) Living Standards, Poverty and Ineqaulity in the UK: 2013 IFS Report RX Goldin, C., and Katz, L. (2008) The Race Between Education and Technology, Harvard University Press, Cambridge MA Goodman, A. and Shephard, A. (2002), Inequality and living standards in Great Britain: some facts, IFS Briefing Note 19, Institute for Fiscal Studies, London Gregg, P. and Wadsworth,J. (2008) Two Sides to Every Story: Measuring Polarization and Inequality in the Distribution of Work, Journal of the Royal Statistical Society Series A Machin, S. (2001) The Changing Nature of Labour Demand in the New Economy and Skill- Biased Technology Change, Oxford Bulletin of Economics and Statistics 63 (S1) Mookherjee and Shorrocks (1982) A Decomposition Analysis of the Trend in UK Income Inequality, The Economic Journal, 92(368), pp Ravallion, M., Datt, G., and van de Walle, D. (1991) Quantifying Absolute Poverty in the Developing World, Review of Income and Wealth no.37 pp

48 Extra slides

49 Variance of logs decomposition Contribution to change Variance of log earnings at start of period Change in variance of log earnings Variance of log hours Variance of log wage Covariance of log hours and log wage Men Women

50 MLD decomposition working households Contribution to change in Mean Log Deviation MLD at start of period Overall change in MLD Within group inequality Within group - changes in population share Between group - changes in population share Between group inequality

51 MLD decomposition pensioner households Contribution to change in Mean Log Deviation MLD at start of period Overall change in MLD Within group inequality Within group - changes in population share Between group - changes in population share Between group inequality